Central Bank Digital Currency (CBDC) is a novel form of a central bank liability, denominated in an existing monetary unit of account, which serves both as an exchange medium and a store of wealth. Each CBDC unit is uniquely identifiable to prevent counterfeiting. It can be stored, transferred, and transmitted by a variety of digital payment systems and services. We are going to tell you all the details.
What Is The Purport Of CBDCs?
Central banks play a guiding role in the global economy: they are responsible for monetary policy. Although the extent to which central banks should influence the market is a matter for discussion, monetary policy control becomes increasingly difficult as financial markets become more complex.
Also, regulators worldwide realize that fiat money is gradually withering away. The current growth of inflation and diminishment of regulators’ means and desire to keep control of it on the global level raise many questions concerning fiat money’s sustainability in the coming years. It means that traditional central banks have to explore new perspectives.
Bitcoin and similar cryptocurrencies are independent means of payment that are out of control of both central and commercial banks. Not surprising that banks are looking another way, namely, CBDCs, which have the best of both worlds: the convenience and security of digital forms of money, like Bitcoin, etc., and the regulated money circulation of the traditional banking sector. Consequently, the number of countries interested in issuing their own CBDCs is steadily increasing.
What Are The Benefits Of CBDCs?
- CBDCs can potentially bring more people to banking: the fact that CBDCs users don’t need bank accounts means that banking can become available to millions of people.
- They have short processing times and inexpensive fees. Sending and receiving them can be done quickly and easily with just a phone if the internet connection is stable.
- Cash is difficult to track, but CBDCs make it easier for banks to track money transfers and combat money laundering.
- These digital currencies can also improve the efficiency and costs of cross-border interbank transactions and reduce counterparty risks (such as bankruptcy, change of political environment, or some circumstances of insuperable force).
What Are The Types Of CBCD?
Generally speaking, there are two types of CBDC — wholesale and retail ones. Wholesale CBDCs would be used by financial institutions to sell and buy financial assets and would replace the existing real-time gross settlement system. Retail CBDCs would be used to pay for things, to make money transfers, and possibly to receive government incentives and subsidies.
There is no direct link between CBDC and blockchain technology. CBDC is a publicly accessible central bank digital money; many technologies can be used to implement it. Central bank digital money could be stored in accounts (as reserves), on prepaid cards, or decentralized database structures such as blockchain, just to name a few options. Of course, the choice of technology would affect the ease of use, liquidity, privacy features, etc.
How Are CBDC Projects Being Developed?
According to the Bank for International Settlements, more than 80% of central banks (in developed countries) test and endorse the possibilities of CBDCs. Eastern Caribbean, the Bahamas, Cambodia, Sweden, and China are the most active in this field, running live pilots. Almost every month, another central bank makes its intention to start a CBDC pilot known.
The most recent example of this kind is the Reserve Bank of Australia: on November 2, 2020, it announced a partnership with National Australia Bank, Commonwealth Bank, Perpetual, and ConsenSys Software on a project to research into the possible employment of a wholesale CBDC. Most central banks are still in the conceptual phase of the development cycle.
It seems fair to say that CBDCs already exist and develop steadily, while interest in them from both central banks and the public is rapidly increasing making them the thing of the future.